Monday, September 12, 2011

Bills compounding

I am not sure anyone has really considered what is the real worst case scenario in the city’s pension pantomime of late. It may be hard to follow along, but this seems to be the default path at the moment.

So go read from Saturday’s the Trib’s report on what is going on between the state and the city over whether it will consider to accept a pledge of future tax revenue as an ‘asset’ on the pension funds books. Sorry, there will be a lot of apostrophes in all of this, it’s unavoidable.

The key issue at the moment seems to be whether or not said ‘transfer’ actually happened at all. The asset was a pledge of $735 million in tax revenue spread out over the next 31 years and presumably valued by its net present value in today’s dollars. The legal issue seems to be over whether any enforceable ‘transfer’ took place of those revenues. It is supposed to be an outright transfer.. as in the pension board all but ‘owns’ those revenues and there won’t be anything the city can do to stop those payments in the future. Irrevocable would be the term. That is about as simple as I can make it.

Hold the thought, but remember the’ irrevocable’ part.

The goal was to prevent the state from taking over the city’s pension system. One outcome of that was that if you looked at the state’s own actuarial report on the city’s pension system… if it were to be taken over the city’s minimum payment to keep the system solvent would ramp up to just under $160 million a year in 2030. Skip for the moment the basic issue that that might indeed be the level of payments the system requires.

So now presume for a moment that the state takes over and the city is now on the hook for those large new payments. Remember the ‘irrevocable’ asset? That is owned by the pension board and will not count against the required payments per the state’s report in the previous link. You see where this is going?

I speculate that the default outcome at the moment is that the city is not only going to be on the hook for the new payments to the state per the report in the previous link, but it has to make those after and on top of the revenues from the pledged ‘asset’. Both will be what hits the city books in a few years. 

Is this an inevitability if the state takes over? If the pledged asset can be taken back, or if those revenues count against the city’s up front contribution requirements… then were they an asset of the pension board in the first place? It sure seems to me that city has painted itself into a corner. A very expensive corner.


Anonymous MH said...

Going a bit off topic, I don't understand why Harrisburg isn't allowed to go bankrupt. Letting a single decision from 40 years ago drag down a city completely ignores why there is a bankruptcy provision in the law, assuming commercial and consumer borrowing is at all related to municipal borrowing. Excluding the interests of the bond holders, the only point of not letting Harrisburg go bankrupt is to keep the perception that municipal bonds are low risk. But, if you’re just punting the day of reckoning down the road a bit, you’ve just artificially hidden the risk.

I'm reminded of how the banks lobbied heavily for tougher bankruptcy laws and then used that legal success to give themselves enough rope to hang themselves and then lobbied for a tax-payer provided stool to get themselves down.

Monday, September 12, 2011 10:48:00 AM  
Anonymous MH said...

On the plus side, at least we don't live in Greece.

Monday, September 12, 2011 10:52:00 AM  
Anonymous BrianTH said...


I think you answered your own question. Try not excluding the interests of bond holders. Assume instead the relevant state officials care more about the interests of bond holders than the interests of the stakeholders in Harrisburg. Now things make sense. In other words, elections have consequences.

Monday, September 12, 2011 12:00:00 PM  
Anonymous BrianTH said...

In response to the main post, I think you need to distinguish two different scenarios:

(A) The City failed to pledge the parking revenues to the pension fund. Without that "asset" the fund is grossly short of 50% as of the cutoff date, and the state takes over;

(B) The City succeeded in pledging the parking revenues to the pension, but screwed up the math. The fund is somewhat short of 50% as of the cutoff date, and the state takes over.

In Scenario A, the City is facing the draconian new contribution schedule, but is it really committed to transferring the parking revenues to the pension fund as well?

In Scenario B, the City may be bound to transfer the parking revenues to the pension fund, but is it still facing the same contribution schedule?

In fact, I will assert that one way or another, one would have to expect that if the parking revenues are in fact transferred to the pension fund, it will reduce the amount of other funding the City will have to provide to the pension fund. The question, then, is when the state could be expected to recognize that the City's contribution schedule should be decreased.

Monday, September 12, 2011 12:09:00 PM  
Anonymous MH said...

In other words, elections have consequences.

As near as I can tell for Harrisburg, the previous governor was determined to make sure whatever happened took place after he was gone.

Monday, September 12, 2011 12:13:00 PM  
Anonymous MH said...

Just in general, if the past five years have taught us anything* it is that elections have fewer consequences for banks than for anybody else.

*Excepting the obvious lesson of "Never buy anything in Florida" but that lesson is into it's fifteenth repeat.

Monday, September 12, 2011 12:16:00 PM  
Anonymous BrianTH said...

MH, sorry, our most recent posts overlapped.

In response to your 12:13 post: I've noticed that when current state officials are criticized, some people tend to respond by pointing out that former state officials are also subject to criticism. While often that may be true, I fail to see the point. Two wrongs don't make a right, and in this case the former official in question wasn't even running for re-election.

Of course I can't guarantee that if the 2010 elections had gone differently, then Harrisburg would be allowed to file for Chapter 9 proceedings. But I don't think it makes sense to overlook how interest group politics in Pennsylvania make the behavior of those who did win the election quite predictable and understandable in that sense.

Monday, September 12, 2011 12:20:00 PM  
Anonymous BrianTH said...


In response to your 12:16 post:

That may be true in relative terms, but a lot of banks have in fact failed, a lot of bank executives have been fired, the banks are subject to new regulations, the banks are subject to a bunch of civil liability (including some government suits), and in general a lot of people have lost money that was invested in banks.

I understand that a sort of "pox on both houses" cynicism has a certain appeal, and it certainly isn't the case that banks lack friends on both sides of the aisle. Nonetheless, I think it is a fundamental mistake not to recognize that there are in fact notable differences in approach between various political actors and entities when it comes to these issues, even if none are as hostile to banks as you would prefer.

Monday, September 12, 2011 12:25:00 PM  
Anonymous MH said...

The only possible attitude toward state politics* is "a pox on both houses." I suppose the governor might be an exception, but the legislature appears to operate mainly to protect both parties from the voters and not to compete with each other. The only thing better than watching a state legislator to prison is watching two state legislators go to prison.

* Also local politics, to the extent there are two houses.

Monday, September 12, 2011 12:51:00 PM  
Anonymous BrianTH said...


I'd suggest you go with "lesser of two evils" instead, because they do in fact represent different interest groups and frequently promote different policies.

To only slightly oversimplify, in this case, one party tends to favor the interests of bond holders but doesn't particularly care about PA's larger cities, and vice-versa for the other party. That answers the question you asked in the first comment. And you can make that observation without concluding that anyone involved is a shining example of personal virtue.

Monday, September 12, 2011 3:06:00 PM  
Anonymous MH said...

I agree that one party doesn't particularly care about PA's large cities relative to the other. However, Harrisburg isn't a very large city. When it comes to paying taxes on income you have earned from holding the bonds, there may be a difference between the two parties, but I'm not aware of any difference between the two parties on using bankruptcy as a way to reduce municipal debt. I haven't followed the issue in detail nationally and will be open to reading any link that you might provide otherwise.

Monday, September 12, 2011 5:34:00 PM  
Anonymous BrianTH said...


Harrisburg is big enough to set a trend (and vote for the wrong party).

This issue has been party-line so far in Pennsylvania. I agree with your prior sentiment that this issue should be considered through focusing on the state level (national politicians have little to do with it). I know other states have recently sought to limit Chapter 9 filings, and many don't allow them in the first place, but I couldn't tell you the partisan valance state by state.

Monday, September 12, 2011 5:57:00 PM  
Blogger Bram Reichbaum said...

I feel like all this means is, the state has us right where it wants us.

It can change the letter of its law, delay, let us "fix" our money transfer or creatively incentivize us towards any contingency as it deems best.

Two principles which are probably going to guide state leaders are: to reduce any possibility of bonded debt default or simply any further declines to our creditworthiness -- and turning Pittsburgh into a fecund petri dish for Republican solutions and Republican notions of wise governance.

Whether / when / how takeover is largely trivia, unless you're anxious to the see how the results of this drama play out within the next year.

Monday, September 12, 2011 6:31:00 PM  
Anonymous Anonymous said...

Anyone with a brain knew that a bunch of people that have never had real jobs and can't find gainful employment elsewhere cooking up a last minute plan in an effort to stick it to a rather inept mayor would never come up with a workable plan. This was all set in stone on Jan. 1st.

Monday, September 12, 2011 8:08:00 PM  
Anonymous MH said...

I agree with your prior sentiment that this issue should be considered through focusing on the state level (national politicians have little to do with it).

My last comment was a big confused. Sorry about that. I was trying to exclude the actual local officials of the potential bankrupt municipality (who have an obvious reason for supporting it), not the whole of state parties. In other word, Harrisburg the city shouldn't count but Harrisburg for state officials would.

Monday, September 12, 2011 8:11:00 PM  
Anonymous BrianTH said...


I think I understand, in which case I believe my point about it being party line so far in the General Assembly (plus the Governor) is relevant.

Wednesday, September 14, 2011 11:09:00 AM  
Anonymous MH said...

Yes, the GA and the governor are relevant in my thinking. However, the last Democratic governor provided aid, not any permission toward bankruptcy. I have already stipulated that one party cares more about the cities. I’m not interested in who helps Harrisburg more, but I’d prefer not to bailout lenders again.

I have not seen a news story in which anyone who isn't a local Harrisburg or of Dauphin County official argue that bankruptcy should be an option. Most of what I read on this is from either this site or the PG, so I could have missed it. But, just to be clear, a Democratic official asking for more help for Harrisburg wouldn't be what I would consider a real difference on this issue.

Wednesday, September 14, 2011 1:15:00 PM  

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